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Credit Risk Management Best Practices (6 Proven Strategies)

What you’ll learn


  • Learn about credit risk management and its impact on your business
  • Dive into the best practices of credit risk management
  • Get tips on how to apply credit risk management strategically

Financial data Whenever you buy something online from a not-so-popular store by making an advance payment, there is a risk of not receiving the product. Similarly, in the B2B world when you offer a product or service to a new customer by extending credit, there is a risk of late or non-payment. How do you manage these credit risks?  You can opt for the cash on delivery(COD) payment method to minimize risk when shopping online. But, how do you deal with delinquent customers in the B2B space? You need robust credit risk management best practices to avoid bad debts and improve cash flow. Let’s dive into this blog and learn more about these practices and how to utilize them.

What are credit risk management best practices?

Salespersons are often in a hurry to onboard customers faster to achieve their targets. They often pressure the finance teams to extend credit without sufficient due diligence. But extending credit without assessing the creditworthiness of the customer is risky. Conducting business with a new customer with no credit history or poor ratings can lead to higher bad debts. Hence, credit risk management best practices need to be in place for risk assessment.

Credit risk management is an ongoing assessment process that protects your business against late or non-payments and improves your financial health. Credit risk management best practices help to maintain cash flow and elevate the efficiency of your business. Here are some crucial factors that you should consider for credit assessment and scoring:

  • Financial health
  • Payment history
  • Business stability
  • Industry risks
  • Business news

Effective credit risk management practices vary from business to business. It involves identifying customers who default on payments frequently and developing a dynamic strategy to mitigate credit risk. Here are the six most efficient credit risk management best practices you need to know in 2022:

  1. Provide online credit application forms
  2. Fill out

    Introduce online credit application forms to make customer onboarding smooth and faster. Make all the essential sections mandatory to avoid missing out on any critical information. 

    An online application makes it easier to gather and store data. Accurate and complete customer information makes your credit risk analysis process more robust. Your credit application must collect the following data:

    • Company information
    • Bank information
    • Commercial trade information
    • Provisions in the event of non-payment
    • The maximum time required to report a quality/quantity issue
    • Terms of payment
    • Description of how disputes would be resolved
    • Your rights to end credit terms
    • Data verification

  3. Analyze and predict credit risk
  4. analysis amico

    You must consider two factors before you extend credit to your customer. First is the creditworthiness of the customer, and the second is the impact on your cash flow if the customer goes delinquent. Before customer onboarding, review their payment history from financial institutions and sources such as:

    • Credit bureaus like D&B, Experian
    • Credit groups like NACM
    • Banks
    • Public financials (such as  income statements, balance sheets, financial ratios, etc.)
    • Other sources such as personal guarantees or trade reference

    Current and historical data available on these sources help improve your credit scoring accuracy. It also lets you identify the creditworthiness and the potential risk posed by any new customers. This approach helps create a strong functional structure for credit risk management and decision-making.

  5. Real-time credit risk monitoring 
  6. credit risk monitoring

    Source: PYMNTS

    Credit risk management is a continuous process. In this constantly changing business environment, periodic review of existing customers is essential. 

    Real-time credit risk monitoring keeps you updated about all the risks and opportunities. It helps to identify and mitigate credit risk before it becomes a problem. For example, if an existing customer is growing and they have strong financials, you might want to consider increasing their credit limit to expand trade with them. But, if an existing customer makes late payments to other vendors and shows signs of delinquency, you might want to reach out to that customer and collect your payment or modify payment terms at the earliest. 

    Signing up with solutions like RadiusOne Credit Risk Application is an efficient way to monitor risk in real-time. Such solutions integrate easily with credit agencies and send alerts to credit risk management teams directly. These solutions alert you in case of:

    • An improvement in credit score
    • A decline in credit score
    • Bankruptcy
    • Recent legal judgments
    • Relocation of business
    • Change in the management

  7. Establish and follow a credit policy 
  8. credit policy

    A credit policy protects your business from financial risks and defaulting customers. A well-defined credit policy allows you to make credit decisions quickly and set payment terms. You must periodically review and update your credit policy to ensure it meets changing market conditions and standards. To avoid disagreements on credit limits between internal teams, clearly define workflows and the person or team responsible to approve credit limits. To make an effective credit policy, you must clearly document and communicate the following:

    • The mission of the credit team 
    • Goals of the organization
    • Roles and responsibilities of team members
    • Credit evaluation process 
    • Collection process 
    • Terms of sale 

  9. Use clear communication for payment terms and conditions  
  10. payment terms and conditions

     Communicating payment terms to customers clearly and on time is crucial to avoid late payments and ensure healthy customer relationships. Here are some extra tips to help you improve customer communications for better credit risk management:

    • Establish precise payment terms
    • Clarify interest rates and taxes
    • Specify due dates and late payment penalties
    • Include conditions for closing the credit limit
    • Specify clauses for dispute management

  11. Leverage automation for fast and accurate credit risk management 
  12. accurate credit risk management

    Source: PYMNTS

    Mid-market organizations are increasingly adopting accounts receivable automation solutions to keep pace with their growing clientele and to minimize credit risk. Automation enables real-time credit management, lowers credit risk, and reduces bad debts. Accounts receivable automation supports:

    • Accurate credit decision-making
    • Automated periodic reviews
    • Faster customer onboarding
    • Bank and trade reference validation
    • Real-time credit risk alerts
    • Alert triggered credit reviews

Conclusion

Mid-market CFOs need to implement innovative credit risk management practices to support business growth and expansion.  While the size and skills of your team are critical to analyzing and managing credit risk, automation solutions can help you scale quickly and make your processes more efficient.

Companies that invest in technology to handle complex credit exposures are likely to have better customer relationships and lower bad debts. HighRadius offers affordable accounts receivable automation solutions for mid-sized businesses. Our RadiusOne AR Suite supports easy and faster customer onboarding and provides standardized credit assessment and real-time risk monitoring. Check out our Credit Risk Application module for more info.

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The HighRadius RadiusOne AR Suite is a complete accounts receivable’s solution designed for mid-sized businesses to put their order-to-cash on auto-pilot with AI-powered solutions. It leverages automation to fast-track key accounts receivable functions including eInvoicing & Collections, Cash Reconciliation, and Credit Risk Management powered by RadiusOne AR Apps to improve productivity, maximize working capital, and enable faster cash conversion. Affordable, quick to deploy, and functionality-rich: it is pre-loaded with industry-specific best-practices and ready-to-plug with popular ERPs such as NetSuite and Sage Intacct. The HighRadius RadiusOne AR Suite is designed to automate labor-intensive processes while streamlining credit and collections activities for faster AR processing, better cash flow and improved profitability.

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